Neuralstem: A Top Regenerative Medicine Play

We continue to be optimistic abut Neuralstem Inc. (CUR). Lead candidate NSI-566 is being studied in ALS, SCI, and ischemic stroke – all significant unmet medical needs and large market opportunities. The company has a number of catalysts emerging this year and is well-capitalized to execute on near-term developments. On March 15, 2013, Neuralstem reported financial results for the fourth quarter and full year 2012. The company reported negligible revenues in the fourth quarter 2012. For the full year 2012, Neuralstem reported total revenues of $0.4 million. Revenues consisted primarily from two sources:

1) A U.S. Department of Defense (DOD) contract, awarded to Loma Linda University, where Neuralstem was selected as the primary subcontractor to develop human neural stem cell technology for the treatment of cancerous brain tumors. In 2012, Neuralstem recognized $234,000, all in the first and second quarter, as the contract ended June 30, 2012. In total, Neuralstem recognized $625,000 from the subcontract.

2) The licensing of the company’s floating cannula spinal cord injection platform. In September 2012, Neuralstem announced that it had granted the first licenses for use of this technology to Q Therapeutics of Salt Lake City, Utah. Neuralstem recognized $173,000 under this agreement in the third and fourth quarter 2012. We suspect that Q Therapeutics will use the technology to deliver its proprietary Q-Cells for the treatment of ALS, MS, and spinal cord injury. We note the company completed its second licensing deal in February 2013 with Cedar Sinai.

Net loss in the fourth quarter totaled $2.8 million, or $0.04 per share. Net loss for the quarter was driven by $2.2 million in R&D and $1.1 million in G&A. This was roughly in-line with our expectations. For the full year 2012, Neuralstem reported a net loss of $10.1 million, or $0.17 per share. Net loss for the year was driven by $6.1 million in R&D and $4.2 million in G&A. Neuralstem exited 2012 with $7.4 million in cash and investments. Total operating and investing burn in 2012 was $8.7 million.

Neuralstem continues to burn around $2.0 to $2.5 million per quarter. We expect some acceleration in the R&D spend over the next few quarters as the company ramps up its development with NSI-566, but view the existing cash balance as sufficient to fund operations into the fourth quarter 2013. Guidance from the company is that the existing cash balance is sufficient to fund operations through year end 2013.

We see the pending data from the phase 1b MDD study as the best option to raise non-dilutive cash in 2013. Full data from the phase 1b study should be available by the end of the third quarter 2013. If the data is positive, we believe Neuralstem will be in position to partner NSI-189 for a handsome upfront payment sufficient to fund operations well into 2014.

ALS Update

Analysis of the phase 1 trial from all 15 patients with ALS has been completed. We remind investors that interim results from the first 12 patients of the trial were published in Stem Cells (2012; 30:1144-1151) in June 2012. Dr. Eva Feldman, MD, PhD, principal investigator of the phase 1 trial, presented safety results from all 18 procedures at the American Neurological Association (ANA) meeting in early October 2012. Results show intraspinal transplantation of NSI-566 to be safe and feasible, even in patients with advanced ALS. Dr. Feldman believes that NSI-566 could be a paradigm shift in the treatment of ALS. Although the phase 1 trial is not powered to demonstrate efficacy, there are signs of disease stabilization the ambulatory subgroup of patients. Additional data was presented at the International Symposium on ALS/MND in December 2012. The data show clear evidence of long-term NSI-566 cell survival in patients, through DNA fingerprinting, as well as safety and tolerability of both the cells and delivery platform.

Neuralstem is now engaged in discussion with the U.S. FDA for the phase 2 study. In the phase 1 study, all patients received 10-15 total injections of 100,000 cells per injection, for a dosing range of up to 1.5 million cells. Injections took place in the lumbar and cervical spine. For example, Patient #11, Ted Harada, received 10 bilateral lumbar and 5 bilateral cervical spine injections at around 100,000 cells per injection. The plan for the phase 2 study is to increase both the number of injections and concentration of cells per injection. We suspect that management and the FDA are in discussion on how exactly this dose step-up will be performed and monitored.

Neuralstem believes it can increase the concentration of the injection to 200,000 or 300,000 cells. In the planned phase 2 trial, a patient might receive 10 lumbar spinal cord injections followed by 10 cervical spinal cord injections, with each injection at 300,000 cells. If one patient can show dramatic improvement in motor and lung function after only 1.5 million cells, management is clearly excited about seeing what 6.0 million cells can do.

Current guidance is for the phase 2 study to begin in the second quarter of 2013. We remind investors that all intraspinal injections for the phase 1 study took place at the Emory University Hospital in Atlanta, GA. The plan for the phase 2 study is to include a second site at the University of Michigan in Ann Arbor, MI. This should help speed up enrollment and increase investigator awareness on the program. It also works to reduce cost to Neuralstem. That being said, Neuralstem has secured a $3.0 million grant from the National Institutes of Health (NIH) that management believes will cover the majority of the cost of the program.

Neuralstem hopes to begin the U.S. phase 2 ALS trial in the second quarter of 2013; however, management is already thinking about the regulatory process and how to accelerate development. The company is looking to conduct a small feasibility trial in Mexico City, Mexico in 2013 to add to the safety database for U.S. regulatory filings. This initial study will be followed by a larger pivotal study (n~100 patients) in Mexico perhaps in 2014. Neuralstem is seeking a development partner for Mexico. Management tells us they have identified a partner and hope to sign a deal in the next few months.

SCI Update

In September 2012, preclinical data was published in Cell. The study, “Long-Distance Growth and Connectivity of Neural Stem Cells After Severe Spinal Cord Injury: Cell-Intrinsic Mechanisms Overcome Spinal Inhibition,” demonstrated that NSI-566 can induce regeneration of injured spinal cord axons into the graft and serve as a bridge to reconnect to gray matter motor neurons for many spinal cord injuries. In the study, rats with surgically transected spinal cords, which rendered them permanently and completely paraplegic, were transplanted with Neuralstem’s NSI-566. The study reports that the animals recovered significant locomotor function, regaining movement in all lower extremity joints.

The results also show that the transplanted neural stem cells turned into neurons which grew a “remarkable” number of axons that extended for “very long distances” over 17 spinal segments, making connections both above and below the point of severance (from C4 to L1). They also appeared to make reciprocal synaptic connectivity with the host rat spinal cord neurons in the gray matter for several segments below the injury. Re-transecting the spinal cord immediately above the graft abolished the functional gain, indicating that the regeneration of host axons into the human stem cell graft was responsible for the functional recovery. The majority (57%) of neural stem cells grafted into neurons, and also sent out new human axons which made new synaptic connections with the host motor neurons in the gray matter below the injury.

In January 2013, Neuralstem received FDA approval to commence a phase I safety trial of NSI-566 in chronic spinal cord injury patients. The open-label, multi-site study will enroll up to eight patients with thoracic spinal cord injuries (T2-T12), designated American Spinal Injury Association (AIS-A) level of impairment, between one and two years after injury. All patients will receive six injections in, or around, the injury site; the first four patients will receive 100,000 cells per injection, and the second four patients will receive 200,000 cells per injection.

The study is expected to take place at four centers all in the U.S., located in Miami, Atlanta, Philadelphia, and Milwaukee All patients will also receive physical therapy post-surgery, as well as immuno-suppressive therapy, which will be for three months, as tolerated. We are expecting the trial to start in the second quarter of 2013. The trial study period will end six months post-surgery for each patient, with a stated goal of trial completion within a one-year time frame. If positive, we suspect that Neuralstem will seek to reproduce the results in chronic spinal cord injury patients with cervical injuries in 2014.

Neuralstem is also seeking to study NSI-566 is patients with acute spinal cord injury. The company is working with CJ CheilJedang to begin a phase 1/2 study in Seoul, South Korea. The trial will be similar in design to the chronic spinal cord injury trial noted above, only enrolling 8-10 patients with acute injury hours after the traumatic event. We expect Neuralstem to file the investigation new drug (IND) application in South Korea in the next few months and hopefully start the trial sometime during the summer of 2013.

Ischemic Stroke Update

In October 2012, the company presented data from rodent studies at the Society for Neurosciences annual meeting (Neuroscience 2012) in poster form entitled, “Histopathological Assessment of Adult Ischemic Rat Brains after 4 Weeks of Intracerebral Transplantation of NSI-566RSC Cell Line.” Rats that suffered ischemic stroke by middle cerebral artery occlusion were transplanted 7 days post-stroke with increasing doses of NSI-566 into the stroke area. Results show a significant and dose-dependent improvement in both motor and neurological tests in the stem cell-treated rats.

A separate poster, “Survival and Differentiation of Human Neural Stem Cells After Grafting into Ischemia-Injured Porcine Brain,” was also presented at Neuroscience 2012. In the study, NSI-566 was transplanted into the brains of pigs that received an ischemic stroke on one side of the brain. Feasibility and safety data was assessed 8 to 9 weeks after the event. Results show that at 6 weeks post-transplantation, there were no complications from the cell transplantation method or the cells. All treated animals showed effective engraftment and neuronal maturation with extensive axonal projections. These data support the application of NSI-566 to be transplanted into a chronic stage of previously ischemia-injured brain for treatment of motor deficits resulting from stroke.

In September 2012, Neuralstem announced it has been approved to commence a clinical trial to treat motor deficits due to ischemic stroke with NSI-566 at BaYi Brain Hospital, in Beijing, China, through its subsidiary, Neuralstem China. The trial will be a combined phase 1/2 design, with a goal to enroll up to 118 patients who have suffered an ischemic stroke with chronic residual motor disorder 4-24 months post-stroke. NSI-566 will be injected directly into the brain (intracerebral injections) and patients will be assessed in two parts. Part one will be an open-label study seeking to enroll up to 18 patients in three cohorts. Each of these will receive ascending doses of NSI-566 to define the maximal safe dose. Part two will be a multi-site, randomized, controlled, single-blind study and enroll up to 100 randomized subjects 1:1 to receive either NSI-566 and physical therapy or physical therapy alone. The primary outcome measures during the follow-up period in part two of the study will be conducted in single-blinded manner. The combined study, including patient monitoring and data collection, is expected to take approximately two years.

NSI-189 Update

Neuralstem is pushing forward with the phase 1b trial studying NSI-189 in major depressive disorder (MDD). The trial is a randomized, double-blind, placebo-controlled, multiple-dose escalating trial evaluating the safety, tolerability, pharmacokinetics and pharmacodynamic effect of three escalating doses of NSI-189 over 28 days per dose in the treatment of MDD. The trial initiated in December 2011. The three NSI-189 dosing cohorts are: 40mg QD (once-daily), 40mg BID (twice-daily), and 40mg TID (three-times-daily).

In October 2012, the FDA allowed Neuralstem to move from first cohort to the second cohort based on the safety seen to date following 40 mg QD. Dosing in the 40mg BID cohort is expected to conclude shortly. This data will be submitted to the FDA for review. Pending approval, Neuralstem will start dosing in the 40mg TID cohort. We expect the review period between cohorts two and three to be roughly one month.

Data from the trial should be available by the end of the third quarter 2013. Neuralstem will be looking for signs of stabilization or growth in the hippocampus. Preclinical data suggests that NSI-189 significantly stimulates the generation of new neurons (neurogenesis) in vitro and in animal models. The data demonstrates clear evidence of increased hippocampal volume in animals with a model of depression. Neuralstem believes NSI-189 has the potential to reverse the hippocampal atrophy associated with major depressive disorder and other related disorders, and to restore fundamental brain physiology.

Besides MDD, we believe that NSI-189 has significant potential to treat other CNS diseases and conditions where hippocampal atrophy may be the underlying cause. These include:

– Alzheimer’s disease – currently in preclinical studies

– Anxiety – currently in preclinical studies

– Bipolar disorder – currently in preclinical studies

– Schizophrenia – currently in preclinical studies

– Post-Traumatic Stress Disorder – currently in preclinical studies

– Chronic Traumatic Encephalopathy – currently in preclinical studies

Following results of the phase 1b study in the third quarter 2013, we expect Neuralstem to sign a development and commercialization partnership for NSI-189. We believe that management will be looking for a larger pharmaceutical partner that can both fund NSI-189 through registration and into commercialization. The market opportunity for MDD is large, estimated at over $5 billion in 2012. Most patients are under-treated, and bounce between both branded and generic SSRI and SNRI molecules. We believe a novel compound with a new mechanism of action could gain significant market share in the right hands.

We suspect that Neuralstem would like to receive an upfront payment commensurate with this large opportunity. However, knowing that molecules pre-phase 2 do not command such sizable upfront payments, we expect that any deal for NSI-189 will instead include a modest upfront payment, but heavy back-end milestones based on development, regulatory approval, and commercialization, along with royalties on sales. The challenge for Neuralstem is that it is seeking to partner NSI-189 pre-phase 2 data. That being said, the preclinical data and potential mechanism of action is intriguing enough that we believe management will be able to secure a deal in 2013 with a modest upfront payment.

We expect that milestones on the development of NSI-189 will help fund the pivotal registration trials in ALS or SCI in the company’s stem cell pipeline. This is a unique opportunity that many of Neuralstem’s competitors are lacking – the ability to self-fund a potentially revolutionary breakthrough in stem cell technology through the advancement of a traditional small molecule platform.

Recommendation

We continue to be optimistic on the Neuralstem story. NSI-566 is currently being studied in ALS, SCI, and ischemic stroke – all significant unmet medical needs and enormous market opportunities. Thanks to recent financings, the company is well funded, with meaningful catalysts on the horizon. Neuralstem is our “Top Pick” for regenerative medicine. We see the shares fairly valued at $2.50 per share; that’s over 100% upside.

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